Buying Contract for Deed?

Question

Hi all,

I recently sent out the second batch of a direct mail marketing campaign and came across a situation in which I am not familiar. I may not even be asking the right questions here so please bear with me.

An out of town owner who owns a property outright in Jacksonville contacted me. After he purchased, he then sold it to a current occupant in a Contract for Deed. He lives in CA and no longer wants to deal with it and would like to sell the contract to me. He even mentioned that if I dont want to purchase, he'd pay me a finder's fee if I found someone to take it over. It's a 30 year contract at 8% that he put in place (29 years remaining).

I dont know a whole lot about this subject and how a deal would work. How would he get his money out of the deal and how would i step in to take over the contract? I really appreciate any input.

Wayne Brooks · Answer

I would think typical note buyers would be interested, yield aside.  You're right that it's not a typical note, secured by a mortgage..it's much better! (In my opinion).  With a typical note you'd have to do a lengthy foreclosure in case of default.  Here, assuming the current owner transfers title to you, you already have the deed, and foreclosure/eviction should be quicker.

Blair Halver · Answer

No prob!  Thanks man.
Blair

Jason Varney · Answer

Blair H. Thanks for the response. That's where I was getting tripped up because it doesn't necessarily seem like a note. So I don't know if there is any marketability to this type of contract. The owner is still holding the deed and it sounds like a situation where it's just a contract that finalizes by deed transfer at the end. I will look into it more but am not overly optimistic. Lots of great info here. Thanks for putting the time into the post!

Blair Halver · Answer

Hi Jason,
My understanding of this situation is that the owner wants to sell you a stream of pre-determined payments.  I can only assume that this is an actual, legally binding note, secured by the real estate.  If it's anything other than that, the risk factor goes up, and along with it the difficulty in making money with it.

So when you want to buy a stream of payments, you need to determine the present value of those future payments.  This can be done with a financial calculator, or an app on your iphone.

If the present value of the payments is say, $100k, then you could offer the seller less than $100k and you'd be getting a more advantageous return on your money than the 8% the installment payments represent.

So if you bought the note at $90k, your return might be 10%.

If you have some cash on hand you want to put somewhere to get it working for you, this could be a good opportunity (depending on numerous other risk factors).

If you don't have cash on hand, you could "flip" this contract to a larger note-buyer.  So you'd contract to buy the note at $80k or whatever, and then flip it to a note-buyer for $90k and keep the spread there.  Just like wholesaling the actual property.

Now, the problem with the "contract for deed" situation is that it is likely not an actual note secured by real estate, but rather simply a contract that says the occupant is paying $X/mo and at the end of the contract he receives the deed.

This type of contract would likely not interest a note-buyer because, obviously, it is not a note.  But I guess it would just depend.  It may be worth looking into.

So basically, the owner you're talking to owns the house, but he has an occupant who is in the process of purchasing it.  I'm not sure there is a way to do anything with the property.  To do so, you'd have to involve the occupant.  What you'd be doing is trying to work a deal with the owner regarding the "paper", not the property.

Note-buying is a whole other world, similar and related to REI, but still different from the typical REI strategies.